HONG KONG — Nearly seven weeks after a powerful earthquake and tsunami hit northeastern
Japan, the
Japanese economy is still struggling to return to normal, and the country faces reconstruction costs that could severely strain its already stretched public finances.
The latest warning about the country’s fiscal health came Wednesday, when
Standard & Poor’s lowered its outlook on Japan to negative, saying that the costs of rebuilding the devastated areas — which it estimated to be as high as ¥50 trillion, or $609 billion — could lead to a lower credit rating unless the government stepped up its efforts to keep high government debt levels from rising much further.
The ratings agency kept its long-term rating for the Japanese economy, which it had downgraded in January, unchanged at AA-minus. But its now negative outlook highlighted the huge uncertainty that overshadows the country’s recovery from the March 11 disaster.
Nearly 26,000 people are missing or have died, tens of thousands of buildings were flattened and hundreds of thousands of cars were destroyed. The flow of components and spare parts needed by manufacturers has been thrown into disarray, and damage to the Fukushima Daiichi Nuclear Power Station has severely disrupted power supplies in key parts of the country.
Expected power shortages during the hot summer months could set back businesses in many parts of the country for months to come, analysts say.
Statements from
Sharp, the electronics manufacturer, and All Nippon Airways, one of the country’s biggest airlines, on Wednesday shed light on the pain and uncertainties felt by many Japanese companies.
“It is extremely difficult at this time to reasonably estimate the impact of the earthquake on our financial results, which will be broad across our entire business activities from production to sales,” Sharp said in a statement. ANA said a sharp drop in air traffic after the quake had cost it
¥19 billion in revenue.
Earlier this week, Canon lowered its annual profit and sales forecasts, while
Toyota has said it will take months for production at its plants to return to prequake levels.
Consumer spending, meanwhile, also has been badly hurt by the disaster. The Japanese government reported Wednesday that retail sales in March had slumped 8.5 percent from the same period a year earlier, the biggest drop in 13 years, and a larger one than analysts had expected.
A large rebound in consumption “looks unlikely in the near future,” Masamichi Adachi, an economist at
JPMorgan Chase in Tokyo, said in a research note. “The concern on the development at the Fukushima Daiichi nuclear plant is expected to persist for while, and consumers appear to be reluctant to spend.”
All of this has bludgeoned an economy that was already burdened by feeble growth,
deflation, an aging population and high government debt levels before the earthquake struck on March 11.
Standard & Poor’s estimated Wednesday that Japan’s reconstruction costs could be in the range of ¥20 trillion to ¥50 trillion.
The extent of environmental contamination in northeastern Japan remains unknown, and although supply chains are expected to return to normal, some manufacturers could decide to move a greater share of production offshore.
In addition, the disruption to manufacturers’ supply chains could undermine the dominant positions that many companies have in their sectors, Takahira Ogawa, a ratings analyst at Standard & Poor’s, said on a conference call.
Although the disasters are unlikely to hurt the economy’s long-term growth potential, that potential is muted in any case. Growth in the medium term is unlikely to rise much above an annual rate of 1 percent, S.&P. said.
The ratings agency forecast that net general government debt could reach 145 percent of gross domestic product in the business year that ends in March 2014 — up from its previous projection of 137 percent.
The vast majority of Japanese government debt is held by domestic investors, and despite its other problems, Japan continues to run a current account surplus, an indication of its strength in exports. Analysts say that means that any downgrade to the country’s debt rating would be unlikely to undermine the Japanese debt markets or sharply raise government borrowing costs.
Indeed, Japanese government bond yields were little changed after the ratings agency’s announcement, while the Nikkei 225-stock index ended the day 1.4 percent higher.
Still, government officials rushed to reassure investors Wednesday about the state of Japan’s public finances.
“The government at present is doing its utmost for disaster relief and reconstruction,” Finance Minister Yoshihiko Noda said, according to Reuters. “It is important to pursue fiscal reform at the same time. Fiscal reform is something we cannot avoid.”
However, Japan’s options for stimulating the economy in the long run without incurring more debt are limited.
The central bank cannot lower interest rates, which are already near zero, meaning that the support measures it announced after the earthquake have focused on supporting lending and pouring liquidity into the financial markets. Economists say that the
Bank of Japan, at its policy meeting Thursday, may further beef up a program to purchase government and corporate bonds.
Parliament, meanwhile, is expected to pass a supplementary budget of ¥4 trillion. Debate on a much larger secondary budget covering full-scale rebuilding has started, said Mr. Adachi, the JPMorgan economist, but there is as yet little clarity about how big that budget will be and how it will be financed.
Meanwhile, the downgraded outlook for Japan again spotlighted the huge debt levels in many of the world’s developed economies. Government debt in Japan, the United States and several European countries — notably Greece, Portugal, Spain and Ireland — have soared in recent years, intensifying the pressure on policy makers to introduce painful fiscal reforms.
Last week, S.&P. issued a similar warning to the United States, saying that the country’s AAA rating was under threat because of budget deficits and the lack of clarity about how the government intended to reduce the debt burden.
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